How Do Decentralized Exchanges (DEXs) Handle the Trading of Smart Contract-Based Derivatives?

DEXs use smart contracts to create an automated and non-custodial trading environment. Instead of traditional order books, many DEXs use Automated Market Makers (AMMs), where assets are traded against liquidity pools.

For derivatives, specialized smart contracts are created that represent the derivative product. Traders can then buy or sell these derivative tokens from the liquidity pool.

The price is determined algorithmically by the ratio of assets in the pool. All trades and settlements are executed automatically by the smart contracts.